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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-39898
Driven Brands Holdings Inc.
(Exact name of Registrant as specified in its charter)
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Delaware |
(State or other jurisdiction of incorporation or organization) |
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47-3595252 |
(I.R.S. Employer Identification No.) |
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440 South Church Street, Suite 700 |
Charlotte, North Carolina |
(Address of principal executive offices) |
Registrant’s telephone number, including area code: (704) 377-8855
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Title of each class |
Common Stock, $0.01 par value |
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Name of each exchange on which registered |
The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ |
Non-accelerated filer ☐ |
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Accelerated filer ☐ |
Small reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of November 6, 2023, the Registrant had 163,959,225 shares of Common Stock outstanding.
Driven Brands Holdings Inc.
Table of Contents
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PART I. FINANCIAL INFORMATION | |
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, trends, plans, objectives of management, impact of accounting standards and guidance, impairments, and expected market growth are forward-looking statements. In particular, forward-looking statements include, among other things, statements relating to: (i) our strategy, outlook, and growth prospects; (ii) our operational and financial targets and dividend policy; (iii) general economic trends and trends in the industry and markets; (iv) the risks and costs associated with the integration of, and or ability to integrate, our stores and business units successfully to achieve anticipated synergies; (v) the proper application of generally accepted accounting principles, which are highly complex and involve many subjective assumptions, estimates, and judgments; and (vi) the competitive environment in which we operate. Forward-looking statements are not based on historical facts, but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions, and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. It is not possible to predict or identify all such risks. These risks include, but are not limited to, the risk factors that are described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as well as in our other filings with the Securities and Exchange Commission, which are available on its website at www.sec.gov. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Forward-looking statements represent our estimates and assumptions only as of the date on which they are made, and we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | | | |
(in thousands, except per share amounts) | September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | |
Franchise royalties and fees | $ | 47,362 | | | $ | 45,562 | | | $ | 140,682 | | | $ | 128,300 | | | | | | | | | |
Company-operated store sales | 389,041 | | | 341,211 | | | 1,159,685 | | | 957,487 | | | | | | | | | |
Independently-operated store sales | 43,582 | | | 40,469 | | | 157,647 | | | 158,500 | | | | | | | | | |
Advertising contributions | 27,121 | | | 22,018 | | | 73,547 | | | 63,807 | | | | | | | | | |
Supply and other revenue | 73,928 | | | 67,334 | | | 218,791 | | | 185,447 | | | | | | | | | |
Total revenue | 581,034 | | | 516,594 | | | 1,750,352 | | | 1,493,541 | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | |
Company-operated store expenses | 262,282 | | | 209,562 | | | 762,731 | | | 580,368 | | | | | | | | | |
Independently-operated store expenses | 25,773 | | | 23,254 | | | 87,095 | | | 85,396 | | | | | | | | | |
Advertising expenses | 27,121 | | | 22,018 | | | 73,547 | | | 63,807 | | | | | | | | | |
Supply and other expenses | 38,816 | | | 41,042 | | | 118,188 | | | 109,616 | | | | | | | | | |
Selling, general, and administrative expenses | 123,012 | | | 82,460 | | | 332,155 | | | 272,657 | | | | | | | | | |
Acquisition related costs | 1,667 | | | 2,325 | | | 7,264 | | | 9,981 | | | | | | | | | |
Store opening costs | 1,372 | | | 753 | | | 3,774 | | | 1,925 | | | | | | | | | |
Depreciation and amortization | 45,639 | | | 36,518 | | | 129,256 | | | 107,628 | | | | | | | | | |
Goodwill impairment | 850,970 | | | — | | | 850,970 | | | — | | | | | | | | | |
Trade name impairment | — | | | — | | | — | | | 125,450 | | | | | | | | | |
Asset impairment charges and lease terminations | 111,239 | | | 2,894 | | | 117,450 | | | 2,910 | | | | | | | | | |
Total operating expenses | 1,487,891 | | | 420,826 | | | 2,482,430 | | | 1,359,738 | | | | | | | | | |
Operating (loss) income | (906,857) | | | 95,768 | | | (732,078) | | | 133,803 | | | | | | | | | |
Other expenses, net: | | | | | | | | | | | | | | | |
Interest expense, net | 41,292 | | | 27,323 | | | 120,304 | | | 78,946 | | | | | | | | | |
Loss on foreign currency transactions | 2,980 | | | 15,582 | | | 3 | | | 30,490 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other expense, net | 44,272 | | | 42,905 | | | 120,307 | | | 109,436 | | | | | | | | | |
(Loss) income before taxes | (951,129) | | | 52,863 | | | (852,385) | | | 24,367 | | | | | | | | | |
Income tax (benefit) expense | (151,818) | | | 14,472 | | | (120,572) | | | 8,592 | | | | | | | | | |
Net (loss) income | (799,311) | | | 38,391 | | | (731,813) | | | 15,775 | | | | | | | | | |
Net loss attributable to non-controlling interest | — | | | — | | | — | | | (15) | | | | | | | | | |
Net (loss) income attributable to Driven Brands Holdings Inc. | $ | (799,311) | | | $ | 38,391 | | | $ | (731,813) | | | $ | 15,790 | | | | | | | | | |
| | | | | | | | | | | | | | | |
(Loss) earnings per share: | | | | | | | | | | | | | | | |
Basic | $ | (4.82) | | | $ | 0.23 | | | $ | (4.40) | | | $ | 0.10 | | | | | | | | | |
Diluted | $ | (4.83) | | | $ | 0.23 | | | $ | (4.41) | | | $ | 0.09 | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | |
Basic | 162,398 | | | 162,760 | | | 162,698 | | | 162,768 | | | | | | | | | |
Diluted | 162,398 | | | 166,831 | | | 162,698 | | | 166,663 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended | | |
(in thousands) | | | | | September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 | | | | |
Net (loss) income | | | | | $ | (799,311) | | | $ | 38,391 | | | $ | (731,813) | | | $ | 15,775 | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | (26,043) | | | (71,063) | | | (8,527) | | | (118,751) | | | | | |
Unrealized (loss) gain from cash flow hedges, net of tax expense (benefit) of $21, $12, $0, and ($14), respectively | | | | | (281) | | | 8,606 | | | (259) | | | 8,513 | | | | | |
Actuarial (loss) gain of defined pension plan, net of tax expense of $0, | | | | | (27) | | | 5 | | | (15) | | | 12 | | | | | |
Other comprehensive loss, net | | | | | (26,351) | | | (62,452) | | | (8,801) | | | (110,226) | | | | | |
Total comprehensive loss | | | | | (825,662) | | | (24,061) | | | (740,614) | | | (94,451) | | | | | |
Comprehensive loss attributable to non-controlling interests | | | | | (13) | | | (15) | | | — | | | (36) | | | | | |
Comprehensive loss attributable to Driven Brands Holdings Inc. | | | | | $ | (825,649) | | | $ | (24,046) | | | $ | (740,614) | | | $ | (94,415) | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
| | | | | | | | | | | |
(in thousands, except share and per share amounts) | September 30, 2023 | | December 31, 2022 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 211,280 | | | $ | 227,110 | |
Restricted cash | 657 | | | 792 | |
Accounts and notes receivable, net | 165,573 | | | 179,888 | |
Inventory | 83,423 | | | 72,040 | |
Prepaid and other assets | 42,208 | | | 40,084 | |
Income tax receivable | 19,641 | | | 15,075 | |
Assets held for sale | 271,006 | | | — | |
Advertising fund assets, restricted | 63,983 | | | 36,421 | |
Total current assets | 857,771 | | | 571,410 | |
Other assets | 42,273 | | | 30,561 | |
Property and equipment, net | 1,408,970 | | | 1,545,738 | |
Operating lease right-of-use assets | 1,394,384 | | | 1,299,189 | |
Deferred commissions | 6,072 | | | 7,121 | |
Intangibles, net | 741,732 | | | 765,903 | |
Goodwill | 1,433,775 | | | 2,277,065 | |
Deferred tax assets | 2,817 | | | 2,911 | |
Total assets | $ | 5,887,794 | | | $ | 6,499,898 | |
Liabilities and shareholders' equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 90,440 | | | $ | 60,606 | |
Accrued expenses and other liabilities | 256,347 | | | 317,318 | |
Income tax payable | 3,546 | | | 4,454 | |
Current portion of long-term debt | 31,869 | | | 32,986 | |
Income tax receivable liability | 54,791 | | | 53,328 | |
Advertising fund liabilities | 38,341 | | | 36,726 | |
Total current liabilities | 475,334 | | | 505,418 | |
Long-term debt | 2,877,059 | | | 2,705,281 | |
Deferred tax liabilities | 141,965 | | | 276,749 | |
Operating lease liabilities | 1,334,539 | | | 1,177,501 | |
Income tax receivable liability | 117,915 | | | 117,915 | |
Deferred revenue | 30,525 | | | 30,046 | |
Long-term accrued expenses and other liabilities | 29,530 | | | 33,419 | |
Total liabilities | 5,006,867 | | | 4,846,329 | |
Commitments and contingencies | | | |
Preferred Stock $0.01 par value; 100,000,000 shares authorized; none issued or outstanding | — | | | — | |
Common stock, $0.01 par value, 900,000,000 shares authorized: and 163,959,225 and 167,404,047 shares outstanding; respectively | 1,639 | | | 1,674 | |
Additional paid-in capital | 1,646,831 | | | 1,628,904 | |
Retained (deficit) earnings | (696,938) | | | 84,795 | |
Accumulated other comprehensive loss | (71,236) | | | (62,435) | |
Total shareholders’ equity attributable to Driven Brands Holdings Inc. | 880,296 | | | 1,652,938 | |
Non-controlling interests | 631 | | | 631 | |
Total shareholders' equity | 880,927 | | | 1,653,569 | |
Total liabilities and shareholders' equity | $ | 5,887,794 | | | $ | 6,499,898 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’/MEMBERS’ EQUITY (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | |
| September 30, 2023 | | September 24, 2022 | |
(in thousands, except share amounts) | Shares | | Amount | | Shares | | Amount | |
Preferred stock, $0.01 par value per share | — | | | $ | — | | | — | | | $ | — | | |
Common stock, $0.01 par value per share | | | | | | | | |
Balance at beginning of period | 167,366,561 | | | $ | 1,674 | | | 167,444,108 | | | $ | 1,674 | | |
Stock issued relating to Employee Stock Purchase Plan | 56,188 | | | 1 | | | 31,783 | | | — | | |
Shares issued for exercise/vesting of share-based compensation awards | 169,784 | | | 1 | | | 15,588 | | | — | | |
Shares repurchased | (3,601,694) | | | (36) | | | — | | | — | | |
Forfeiture of restricted stock awards | (31,614) | | | (1) | | | (87,432) | | | — | | |
Balance at end of period | 163,959,225 | | | $ | 1,639 | | | 167,404,047 | | | $ | 1,674 | | |
Additional paid-in capital | | | | | | | | |
Balance at beginning of period | | | $ | 1,637,945 | | | | | $ | 1,614,927 | | |
Equity-based compensation expense | | | 2,681 | | | | | 5,308 | | |
Exercise of stock options | | | 4,737 | | | | | 245 | | |
Stock issued relating to Employee Stock Purchase Plan | | | 1,468 | | | | | — | | |
| | | | | | | | |
Balance at end of period | | | $ | 1,646,831 | | | | | $ | 1,620,480 | | |
Retained (deficit) earnings | | | | | | | | |
Balance at beginning of period | | | $ | 152,293 | | | | | $ | 19,006 | | |
Shares repurchased | | | (49,920) | | | | | — | | |
Net (loss) income | | | (799,311) | | | | | 38,391 | | |
Balance at end of period | | | $ | (696,938) | | | | | $ | 57,397 | | |
Accumulated other comprehensive loss | | | | | | | | |
Balance at beginning of period | | | $ | (44,898) | | | | | $ | (52,796) | | |
Other comprehensive loss | | | (26,338) | | | | | (62,437) | | |
Balance at end of period | | | $ | (71,236) | | | | | $ | (115,233) | | |
Non-controlling interests | | | | | | | | |
Balance at beginning of period | | | $ | 644 | | | | | $ | 646 | | |
| | | | | | | | |
Other comprehensive (loss) | | | (13) | | | | | (15) | | |
| | | | | | | | |
| | | | | | | | |
Balance at end of period | | | $ | 631 | | | | | $ | 631 | | |
| | | | | | | | |
Total shareholders’ equity | | | $ | 880,927 | | | | | $ | 1,564,949 | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’/MEMBERS’ EQUITY (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
(in thousands, except share amounts) | Shares | | Amount | | Shares | | Amount |
Preferred stock, $0.01 par value per share | — | | | $ | — | | | — | | | $ | — | |
Common stock, $0.01 par value per share | | | | | | | |
Balance at beginning of period | 167,404,047 | | | $ | 1,674 | | | 167,380,450 | | | $ | 1,674 | |
Stock issued relating to Employee Stock Purchase Plan | 82,546 | | | 1 | | | 143,707 | | | 1 | |
Shares issued for exercise/vesting of share-based compensation awards | 348,087 | | | 3 | | | 35,788 | | | — | |
Share repurchases | (3,601,694) | | | (36) | | | — | | | — | |
Forfeiture of restricted stock awards | (273,761) | | | (3) | | | (155,898) | | | (1) | |
Balance at end of period | 163,959,225 | | | $ | 1,639 | | | 167,404,047 | | | $ | 1,674 | |
Additional paid-in capital | | | | | | | |
Balance at beginning of period | | | $ | 1,628,904 | | | | | $ | 1,605,890 | |
Equity-based compensation expense | | | 9,730 | | | | | 12,159 | |
Exercise of stock options | | | 6,117 | | | | | 2,431 | |
Stock issued relating to Employee Stock Purchase Plan | | | 2,080 | | | | | — | |
| | | | | | | |
Balance at end of period | | | $ | 1,646,831 | | | | | $ | 1,620,480 | |
Retained (deficit) earnings | | | | | | | |
Balance at beginning of period | | | $ | 84,795 | | | | | $ | 41,607 | |
Share repurchases | | | (49,920) | | | | | — | |
Net (loss) income | | | (731,813) | | | | | 15,790 | |
Balance at end of period | | | $ | (696,938) | | | | | $ | 57,397 | |
Accumulated other comprehensive loss | | | | | | | |
Balance at beginning of period | | | $ | (62,435) | | | | | $ | (5,028) | |
Other comprehensive loss | | | (8,801) | | | | | (110,205) | |
Balance at end of period | | | $ | (71,236) | | | | | $ | (115,233) | |
Non-controlling interests | | | | | | | |
Balance at beginning of period | | | $ | 631 | | | | | $ | 1,099 | |
Net loss | | | — | | | | | (15) | |
Other comprehensive loss | | | — | | | | | (21) | |
Divestiture of Denmark car wash operations | | | — | | | | | (432) | |
| | | | | | | |
Balance at end of period | | | $ | 631 | | | | | $ | 631 | |
| | | | | | | |
Total shareholders’ equity | | | $ | 880,927 | | | | | $ | 1,564,949 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | | |
| Nine Months Ended |
(in thousands) | September 30, 2023 | | September 24, 2022 |
Net (loss) income | $ | (731,813) | | | $ | 15,775 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Depreciation and amortization | 129,256 | | | 107,628 | |
Goodwill impairment | 850,970 | | | — | |
Trade name impairment | — | | | 125,450 | |
| | | |
Equity-based compensation expense | 9,730 | | | 12,159 | |
Loss on foreign denominated transactions | 3,706 | | | 30,490 | |
Gain on foreign currency derivatives | (3,704) | | | (2,981) | |
Loss (gain) on sale and disposal of businesses, fixed assets, and sale-leaseback transactions | 1,730 | | | (12,183) | |
Reclassification of interest rate hedge to income | (1,358) | | | — | |
Bad debt expense | 1,244 | | | 1,011 | |
Asset impairment costs | 117,450 | | | 2,910 | |
Amortization of deferred financing costs and bond discounts | 6,287 | | | 6,807 | |
Benefit for deferred income taxes | (134,266) | | | (38,216) | |
| | | |
Other, net | 24,432 | | | 15,620 | |
Changes in assets and liabilities, net of acquisitions: | | | |
Accounts and notes receivable, net | 2,464 | | | (40,296) | |
Inventory | (12,531) | | | (17,898) | |
Prepaid and other assets | (3,909) | | | 850 | |
Advertising fund assets and liabilities, restricted | (10,923) | | | (4,612) | |
Other Assets | (29,210) | | | (3,767) | |
Deferred commissions | 658 | | | 917 | |
Deferred revenue | 1,961 | | | 2,222 | |
Accounts payable | 24,913 | | | (12,321) | |
Accrued expenses and other liabilities | (29,442) | | | (59,844) | |
Income tax receivable | (5,612) | | | 37,931 | |
| | | |
Cash provided by operating activities | 212,033 | | | 167,652 | |
Cash flows from investing activities: | | | |
Capital expenditures | (482,633) | | | (276,222) | |
Cash used in business acquisitions, net of cash acquired | (53,641) | | | (652,085) | |
Proceeds from sale-leaseback transactions | 172,230 | | | 150,112 | |
| | | |
| | | |
| | | |
Proceeds from sale or disposal of businesses and fixed assets | 2,837 | | | 6,427 | |
Cash used in investing activities | (361,207) | | | (771,768) | |
Cash flows from financing activities: | | | |
| | | |
| | | |
| | | |
| | | |
Repayment of long-term debt | (20,969) | | | (15,772) | |
Proceeds from revolving lines of credit and short-term debt | 335,000 | | | 300,000 | |
Repayments of revolving lines of credit and short-term debt | (120,000) | | | — | |
Repayment of principal portion of finance lease liability | (2,020) | | | (2,229) | |
| | | |
| | | |
Share repurchases | (49,956) | | | — | |
| | | |
| | | |
Stock option exercises | 6,117 | | | 651 | |
Other, net | (322) | | | (70) | |
Cash provided by financing activities | 147,850 | | | 282,580 | |
| | | |
| | | |
| | | |
| | | |
| | | | | | | | | | | |
| | | |
Effect of exchange rate changes on cash | 365 | | | (7,705) | |
Net change in cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted | (959) | | | (329,241) | |
Cash and cash equivalents, beginning of period | 227,110 | | | 523,414 | |
Cash included in advertising fund assets, restricted, beginning of period | 32,871 | | | 38,586 | |
Restricted cash, beginning of period | 792 | | | 792 | |
Cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted, beginning of period | 260,773 | | | 562,792 | |
Cash and cash equivalents, end of period | 211,280 | | | 190,373 | |
Cash included in advertising fund assets, restricted, end of period | 47,877 | | | 42,386 | |
Restricted cash, end of period | 657 | | | 792 | |
Cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted, end of period | $ | 259,814 | | | $ | 233,551 | |
| | | | | | | | | | | |
Supplemental cash flow disclosures - non-cash items: | | | |
Capital expenditures included in accrued expenses and other liabilities | $ | 24,855 | | | $ | 8,539 | |
Deferred consideration included in accrued expenses and other liabilities | 9,275 | | | 32,179 | |
| | | |
Supplemental cash flow disclosures - cash paid for: | | | |
Interest | $ | 120,261 | | | $ | 78,572 | |
Income taxes | 18,586 | | | 9,184 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1—Description of Business
Description of Business
Driven Brands Holdings Inc. together with its subsidiaries (collectively, the “Company”) is a Delaware corporation and is the parent holding company of Driven Brands, Inc. and Shine Holdco (UK) Limited (collectively, “Driven Brands”). Driven Brands is the largest automotive services company in North America with a growing and highly-franchised base of approximately 5,000 franchised, independently-operated, and company-operated locations across 49 U.S. states and 13 other countries. The Company has a portfolio of highly recognized brands, including Take 5 Oil Change®, Take 5 Car Wash®, Meineke Car Care Centers®, MAACO®, CARSTAR®, Auto Glass Now®, and 1-800-Radiator & A/C® that compete in the automotive services industry. Approximately 74% of the Company’s locations are franchised or independently-operated.
Tax Receivable Agreement
The Company expects to be able to utilize certain tax benefits which are related to periods prior to the effective date of the Company’s IPO and are attributed to current and former shareholders. The Company previously entered into a tax receivable agreement which provides our pre-IPO shareholders with the right to receive payment of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local, and provincial income tax that the Company will actually realize. The tax receivable agreement was effective as of the date of the Company’s IPO. The Company recorded a current tax receivable liability of $55 million and $53 million as of September 30, 2023 and December 31, 2022, respectively, and a non-current tax receivable liability of $118 million as of September 30, 2023 and December 31, 2022, on the consolidated balance sheets.
Note 2— Summary of Significant Accounting Policies
Fiscal Year
The Company operates and reports financial information on a 52- or 53-week year with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The three and nine months ended September 30, 2023 and September 24, 2022, each consisted of 13 weeks and 39 weeks, respectively. The Car Wash segment is currently consolidated based on a calendar month end.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited interim financial data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of operations, balance sheet, cash flows, and shareholders’/members’ equity for the interim periods presented. The adjustments include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2022. Certain information and note disclosures normally included in the unaudited financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 30, 2023 may not be indicative of the results to be expected for any other interim period or the year ending December 30, 2023.
During the third quarter ending September 30, 2023, the Company began depreciating construction in progress relating to stores opened and placed into service during the fourth quarter of 2022 and the first half of 2023. The Company recorded an additional $4 million of depreciation expense for these assets in the three months ended September 30, 2023, of which less than $2 million related to each of the three months ended April 1, 2023 and July 1, 2023, respectively, and less than $1 million related to the year ended December 31, 2022. The Company evaluated the impact of the error and out-of-period adjustment and concluded it was not material to any previously issued interim or annual consolidated financial statements and the adjustment is not expected to be material to the year ending December 30, 2023.
Certain prior year amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the unaudited consolidated financial statements and the related notes to the unaudited consolidated financial statements. Significant items that are subject to estimates and assumptions include, but are not limited to, valuation of intangible assets and goodwill; income taxes; allowances for credit losses; valuation of derivatives; self-insurance claims; and stock-based compensation. Management evaluates its estimates on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on historical experience, current conditions, and various other additional information, may affect amounts reported in future periods. Actual results could differ due to uncertainty inherent in the natures of these estimates.
Shares Repurchased
We record shares repurchased on their trade date and reduce shareholders’ equity and increase accounts payable. Shares repurchased are retired, and the excess of repurchase price over the par value of the shares is charged to retained earnings.
Fair Value of Financial Instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 are summarized as follows:
| | | | | | | | | | | | | | | | | |
Items Measured at Fair Value at September 30, 2023 |
(in thousands) | Level 1 | | Level 2 | | Total |
Mutual fund investments held in rabbi trust | $ | — | | | $ | — | | | $ | — | |
Derivative assets, recorded in prepaid and other assets | — | | | 215 | | | 215 | |
Derivative assets, recorded in other assets | — | | | 2,804 | | | 2,804 | |
Derivative liabilities, recorded in accrued expenses and other liabilities | — | | | 260 | | | 260 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
Items Measured at Fair Value at December 31, 2022 |
(in thousands) | Level 1 | | Level 2 | | Total |
Mutual fund investments held in rabbi trust | $ | 758 | | | $ | — | | | $ | 758 | |
Derivative assets, recorded in prepaid and other assets | — | | | 158 | | | 158 | |
Derivative assets, recorded in other assets | — | | | 2,148 | | | 2,148 | |
Derivative liabilities, recorded in accrued expenses and other liabilities | — | | | 5,005 | | | 5,005 | |
The fair value of the Company’s foreign currency derivative instruments is derived from valuation models, which use Level 2 observable inputs such as quoted market prices, interest rates, and forward yield curves.
The carrying value and estimated fair value of total long-term debt were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
(in thousands) | Carrying value | | Estimated fair value | | Carrying value | | Estimated fair value |
Long-term debt | $ | 2,945,675 | | | $ | 2,691,397 | | | $ | 2,784,175 | | | $ | 2,477,456 | |
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2024. On June 2, 2023, the Company entered into a loan amendment to transition our LIBOR-based loans to the Secured Overnight Financing Rate (“SOFR”). The amendment went into effect on July 1, 2023 and did not have a material impact on the loans affected.
Note 3—Acquisitions and Dispositions
The Company strategically acquires companies and assets to increase its footprint and offer products and services that diversify its existing offerings, primarily through asset purchase agreements. These acquisitions are accounted for as business combinations using the acquisition method, whereby the purchase price is allocated to the assets acquired and liabilities assumed, based on their fair values as of the date of the acquisition with the remaining amount recorded in goodwill.
2023 Acquisitions
The Company completed five acquisitions in the Maintenance segment during the nine months ended September 30, 2023, representing five sites. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $8 million.
The Company completed three acquisitions in the Car Wash segment during the nine months ended September 30, 2023, representing four sites. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $15 million.
The Company completed two acquisitions in the Paint, Collision & Glass segment during the nine months ended September 30, 2023, representing two sites. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $6 million.
The Company estimated the fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The provisional amounts for assets acquired and liabilities assumed for the 2023 acquisitions are as follows:
Maintenance Segment
| | | | | | | |
(in thousands) | | | Maintenance |
Assets: | | | |
Operating lease right-of-use assets | | | $ | 2,678 | |
Property and equipment, net | | | 3,805 | |
Goodwill | | | 3,759 | |
Deferred tax asset | | | 10 | |
Assets acquired | | | 10,252 | |
Liabilities: | | | |
Accrued expenses and other liabilities | | | 179 | |
Operating lease liabilities | | | 2,476 | |
Total liabilities assumed | | | 2,655 | |
Cash consideration, net of cash acquired | | | 7,206 | |
Deferred consideration | | | 390 | |
Total consideration, net of cash acquired | | | $ | 7,596 | |
Car Wash Segment
| | | | | | | |
(in thousands) | | | Car Wash |
Assets: | | | |
Operating lease right-of-use assets | | | $ | 1,249 | |
Property and equipment, net | | | 11,181 | |
Goodwill | | | 4,125 | |
Assets acquired | | | 16,555 | |
Liabilities: | | | |
Accrued expenses and other liabilities | | | 11 | |
Deferred tax liability | | | 6 | |
Operating lease liabilities | | | 1,220 | |
| | | |
Total liabilities assumed | | | 1,237 | |
Cash consideration, net of cash acquired | | | 15,293 | |
Deferred consideration | | | 25 | |
Total consideration, net of cash acquired | | | $ | 15,318 | |
Paint, Collision & Glass Segment
| | | | | | | | |
(in thousands) | | | Paint, Collision & Glass | |
Assets: | | | | |
| | | | |
Inventory | | | $ | 35 | | |
Property and equipment, net | | | 667 | |
Goodwill | | | 4,889 | | |
Deferred tax asset | | | 51 | | |
Assets acquired | | | 5,642 | | |
| | | | |
| | | | |
| | | | |
| | | | |
Cash consideration, net of cash acquired | | | 4,947 | | |
Deferred consideration | | | 695 | | |
Total consideration, net of cash acquired | | | $ | 5,642 | | |
Goodwill represents the excess of the consideration paid over the fair value of net assets acquired and includes the expected benefit of synergies within the existing segments and intangible assets that do not qualify for separate recognition. Goodwill,
which was allocated to the Car Wash, Maintenance, and Paint, Collision & Glass segments, is substantially all deductible for income tax purposes.
Deferred Consideration and Transaction Costs
Deferred consideration is typically paid six months to one-year after the acquisition closing date once all conditions under the purchase agreement have been satisfied.
| | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | |
(in thousands) | September 30, 2023 | | September 24, 2022 | | | | | | |
Deferred consideration at beginning of period | $ | 35,007 | | | $ | 16,000 | | | | | | | |
Change in accrual | 1,600 | | | 31,470 | | | | | | | |
Payments | (27,332) | | | (15,291) | | | | | | | |
Deferred consideration at end of period | $ | 9,275 | | | $ | 32,179 | | | | | | | |
The Company incurred less than $1 million and approximately $1 million of transaction costs during the three months ended September 30, 2023 and September 24, 2022, respectively. The Company incurred less than $1 million and approximately $4 million of transaction costs during the nine months ended September 30, 2023 and September 24, 2022, respectively.
2022 Disposition
On March 16, 2022, the Company disposed of its 75% owned subsidiary, IMO Denmark ApS, for consideration of $2 million. As a result of the sale, a $1 million loss was recognized within selling, general, and administrative expenses during the nine months ended September 24, 2022. Also, a noncontrolling interest of less than $1 million was derecognized. The Company allocated less than $1 million of goodwill as part of the sale.
Note 4— Revenue from Contracts with Customers
The Company records contract assets for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year and if such costs are material. Commission expenses, a primary cost associated with the sale of franchise licenses, are amortized to selling, general and administrative expenses in the consolidated statements of operations ratably over the life of the associated franchise agreement.
Capitalized costs to obtain a contract as of September 30, 2023 and December 31, 2022 were $6 million and $7 million, respectively, and are presented within deferred commissions on the consolidated balance sheets. The Company recognized less than $1 million of costs during the three months ended September 30, 2023 and September 24, 2022, respectively, that were recorded as a contract asset at the beginning of the periods. The Company recognized $1 million and less than $1 million of costs during the nine months ended September 30, 2023 and September 24, 2022, respectively, that were recorded as a contract asset at the beginning of the periods.
Contract liabilities consist primarily of deferred franchise fees and deferred development fees. The Company had contract liabilities of $31 million and $29 million as of September 30, 2023 and December 31, 2022, respectively, which are presented within deferred revenue on the consolidated balance sheets. The Company recognized $1 million and less than $1 million of revenue relating to contract liabilities during the three months ended September 30, 2023 and September 24, 2022, respectively. The Company recognized $4 million and $3 million of revenue relating to contract liabilities during the nine months ended September 30, 2023 and September 24, 2022, respectively.
Note 5—Segment Information
The Company’s worldwide operations are comprised of the following reportable segments: Maintenance, Car Wash, Paint, Collision & Glass, and Platform Services.
In addition to the reportable segments, the Company’s consolidated financial results include “Corporate and Other” activity. Corporate and Other incurs costs related to advertising fund revenues and expenses and shared service costs, which are related to finance, information technology, human resources, legal, supply chain, and other support services. Corporate and Other activity includes the adjustments necessary to eliminate intercompany transactions, namely sales by the Platform Services segment to the Paint, Collision & Glass and Maintenance segments.
Segment results for the three and nine months ended September 30, 2023 and September 24, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2023 |
(in thousands) | Maintenance | | Car Wash | | Paint, Collision & Glass | | Platform Services | | Corporate and Other | | Total |
Franchise royalties and fees | $ | 14,566 | | | $ | — | | | $ | 23,799 | | | $ | 8,997 | | | $ | — | | | $ | 47,362 | |
Company-operated store sales | 204,460 | | 98,132 | | | 85,207 | | | 1,242 | | | — | | | 389,041 | |
Independently-operated store sales | — | | | 43,582 | | | — | | | — | | | — | | | 43,582 | |
Advertising fund contributions | — | | | — | | | — | | | — | | | 27,121 | | | 27,121 | |
Supply and other revenue | 25,333 | | | 1,099 | | | 20,408 | | | 45,695 | | | (18,607) | | | 73,928 | |
Total revenue | $ | 244,359 | | | $ | 142,813 | | | $ | 129,414 | | | $ | 55,934 | | | $ | 8,514 | | | $ | 581,034 | |
Segment Adjusted EBITDA | $ | 86,493 | | | $ | 24,429 | | | $ | 32,763 | | | $ | 22,417 | | | $ | (37,487) | | | $ | 128,615 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 24, 2022 |
(in thousands) | Maintenance | | Car Wash | | Paint, Collision & Glass | | Platform Services | | Corporate and Other | | Total |
Franchise royalties and fees | $ | 11,625 | | | $ | — | | | $ | 24,055 | | | $ | 9,882 | | | $ | — | | | $ | 45,562 | |
Company-operated store sales | 172,162 | | | 98,235 | | | 69,383 | | | 1,431 | | | — | | | 341,211 | |
Independently-operated store sales | — | | | 40,469 | | | — | | | — | | | — | | | 40,469 | |
Advertising fund contributions | — | | | — | | | — | | | — | | | 22,018 | | | 22,018 | |
Supply and other revenue | 17,035 | | | 1,599 | | | 19,782 | | | 40,686 | | | (11,768) | | | 67,334 | |
Total revenue | $ | 200,822 | | | $ | 140,303 | | | $ | 113,220 | | | $ | 51,999 | | | $ | 10,250 | | | $ | 516,594 | |
Segment Adjusted EBITDA | $ | 68,763 | | | $ | 39,098 | | | $ | 38,919 | | | $ | 19,765 | | | $ | (36,437) | | | $ | 130,108 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2023 |
(in thousands) | Maintenance | | Car Wash | | Paint, Collision & Glass | | Platform Services | | Corporate and Other | | Total |
Franchise royalties and fees | $ | 41,224 | | | $ | — | | | $ | 74,627 | | | $ | 24,831 | | | $ | — | | | $ | 140,682 | |
Company-operated store sales | 605,393 | | | 302,193 | | | 248,796 | | | 3,303 | | | — | | | 1,159,685 | |
Independently-operated store sales | — | | | 157,647 | | | — | | | — | | | — | | | 157,647 | |
Advertising fund contributions | — | | | — | | | — | | | — | | | 73,547 | | | 73,547 | |
Supply and other revenue | 67,737 | | | 4,708 | | | 59,952 | | | 137,171 | | | (50,777) | | | 218,791 | |
Total revenue | $ | 714,354 | | | $ | 464,548 | | | $ | 383,375 | | | $ | 165,305 | | | $ | 22,770 | | | $ | 1,750,352 | |
Segment Adjusted EBITDA | $ | 245,232 | | | $ | 112,001 | | | $ | 109,724 | | | $ | 61,984 | | | $ | (119,088) | | | $ | 409,853 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 24, 2022 |
(in thousands) | Maintenance | | Car Wash | | Paint, Collision & Glass | | Platform Services | | Corporate and Other | | Total |
Franchise royalties and fees | $ | 32,586 | | | $ | — | | | $ | 69,025 | | | $ | 26,689 | | | $ | — | | | $ | 128,300 | |
Company-operated store sales | 497,638 | | | 294,526 | | | 161,348 | | | 3,975 | | | — | | | 957,487 | |
Independently-operated store sales | — | | | 158,500 | | | — | | | — | | | — | | | 158,500 | |
Advertising fund contributions | — | | | — | | | — | | | — | | | 63,807 | | | 63,807 | |
Supply and other revenue | 43,645 | | | 5,131 | | | 57,577 | | | 117,704 | | | (38,610) | | | 185,447 | |
Total revenue | $ | 573,869 | | | $ | 458,157 | | | $ | 287,950 | | | $ | 148,368 | | | $ | 25,197 | | | $ | 1,493,541 | |
Segment Adjusted EBITDA | $ | 185,324 | | | $ | 148,495 | | | $ | 100,847 | | | $ | 54,471 | | | $ | (103,922) | | | $ | 385,215 | |
The reconciliations of Income before taxes to Segment Adjusted EBITDA for the three and nine months ended September 30, 2023 and September 24, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | |
(in thousands) | September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 | | | | |
(Loss) income before taxes | $ | (951,129) | | | $ | 52,863 | | | $ | (852,385) | | | $ | 24,367 | | | | | |
Depreciation and amortization | 45,639 | | | 36,518 | | | 129,256 | | | 107,628 | | | | | |
Interest expense, net | 41,292 | | | 27,323 | | | 120,304 | | | 78,946 | | | | | |
Acquisition related costs(a) | 1,667 | | | 2,325 | | | 7,264 | | | 9,981 | | | | | |
Non-core items and project costs, net(b) | 1,486 | | | 851 | | | 6,113 | | | 3,436 | | | | | |
Store opening costs | 1,372 | | | 753 | | | 3,774 | | | 1,925 | | | | | |
| | | | | | | | | | | |
Straight-line rent adjustment(c) | 5,193 | | | 3,220 | | | 14,196 | | | 11,530 | | | | | |
Cloud computing amortization(d) | 991 | | | — | | | 991 | | | — | | | | | |
Equity-based compensation expense(e) | 2,681 | | | 5,308 | | | 9,730 | | | 12,159 | | | | | |
Foreign currency transaction loss, net(f) | 2,980 | | | 15,582 | | | 3 | | | 30,490 | | | | | |
Bad debt expense(g) | — | | | (449) | | | — | | | (449) | | | | | |
Goodwill impairment(h) | 850,970 | | | — | | | 850,970 | | | — | | | | | |
Trade name impairment(i) | — | | | — | | | — | | | 125,450 | | | | | |
Asset sale leaseback (gain) loss, impairment and closed store expenses(j) | 125,473 | | | (14,186) | | | 119,637 | | | (20,248) | | | | | |
| | | | | | | | | | | |
Segment Adjusted EBITDA | $ | 128,615 | | | $ | 130,108 | | | $ | 409,853 | | | $ | 385,215 | | | | | |
(a) Consists of acquisition costs as reflected within the unaudited consolidated statements of operations, including legal, consulting and other fees, and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in
connection with other acquisitions in the future and, under U.S. GAAP, such costs relating to acquisitions are expensed as incurred.
(b) Consists of discrete items and project costs, including third party consulting and professional fees associated with strategic transformation initiatives as well as non-recurring payroll-related costs.
(c) Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under U.S. GAAP exceeds or is less than our cash rent payments.
(d) Includes non-cash amortization expenses relating cloud computing arrangements.
(e) Represents non-cash equity-based compensation expense.
(f) Represents foreign currency transaction (gains) losses, net that primarily related to the remeasurement of our intercompany loans, which are partially offset by unrealized gains and losses on remeasurement of cross currency swaps and forward contracts.
(g) Represents the recovery of previously uncollectible receivables outside of normal operations.
(h) Relates to a goodwill impairment within the Car Wash segment. Refer to Note 6 for additional information. (i) Certain indefinite lived Car Wash trade names were impaired as the Company elected to discontinue their use. Refer to Note 6 for additional information. (j) Relates to (gains) losses, net on sale leasebacks, impairment of certain fixed assets and operating lease right-of-use assets related to closed and underperforming locations, assets held for sale, and lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates. Refer to Note 6 for additional information. Note 6 — Asset Impairment Charges
2023 Goodwill and Asset Impairment Charges
During the quarter ended September 30, 2023, management performed a strategic review of the U.S. car wash operations, which included, but was not limited to, an evaluation of the following: store performance, the competitive landscape, revenue and expense optimization opportunities, and capital requirements. As a result of this strategic review, management approved the closure of 29 stores, halted the opening of new company-operated stores, and began marketing property and equipment for sale that will not be utilized by the Company. These actions resulted in impairment charges of $111 million relating to property and equipment, including assets held for sale, and right-of-use assets during the three months ended September 30, 2023 and the transfer of $271 million of assets from property and equipment to assets held for sale on the unaudited consolidated balance sheet as of September 30, 2023. Management expects the sale of these assets to occur over the next twelve months.
As a result of the evaluation performed above, as well as other qualitative and quantitative factors, including a decline in the stock price during the third quarter of 2023, management determined a triggering event had occurred requiring a step one quantitative analysis of the Company’s goodwill and indefinite lived intangible assets. Based on the results of our interim impairment analysis, we concluded the carrying value of the U.S. Car Wash reporting unit exceeded its fair value, and we recorded a full goodwill impairment charge of $851 million during the three months ended September 30, 2023. The fair value of the remaining reporting units exceeded their carrying amounts, indicating no goodwill impairment. The fair values of each reporting unit were determined using a combination of the income approach and market approach valuation methodologies.
The Company will continue to monitor the other reporting units. Reporting units that do not perform in accordance with expectations could result in impairment charges to other reporting units in future periods, including International Car Wash and Maintenance-Repair, primarily comprised of the Meineke brand.
2022 Trade name Impairment Charges
The Company has acquired a number of car wash businesses since 2020. As part of those acquisitions, the Company determined a fair value for each of the associated intangible assets including trade names and customer relationships. During the quarter ended June 25 2022, the Company made the strategic decision to rebrand the majority of its U.S. car wash locations to operate under the name “Take 5 Car Wash”, and therefore discontinued the use of certain car wash trade names that were previously determined to have indefinite lives. Using a projected discounted cash flow analysis based on the relief from royalty method, the fair value of the trade names was determined to be $6 million while their carrying value was $132 million. As a result, the Company recognized a $126 million impairment charge during the nine months ended September 24, 2022, which is reported as trade name impairment charge in the unaudited consolidated statement of operations. The transition will take approximately two and a half years to complete from the date of impairment, and therefore the remaining carrying value is being amortized over 30 months from the date of impairment.
Note 7 — Long-Term Debt
The Company’s long-term debt obligations consist of the following:
| | | | | | | | | | | |
(in thousands) | September 30, 2023 | | December 31, 2022 |
Series 2018-1 Securitization Senior Notes, Class A-2 | $ | 259,875 | | | $ | 261,938 | |
Series 2019-1 Securitization Senior Notes, Class A-2 | 285,750 | | | 288,000 | |
Series 2019-2 Securitization Senior Notes, Class A-2 | 264,000 | | | 266,063 | |
Series 2020-1 Securitization Senior Notes, Class A-2 | 169,313 | | | 170,625 | |
Series 2020-2 Securitization Senior Notes, Class A-2 | 437,625 | | | 441,000 | |
Series 2021-1 Securitization Senior Notes, Class A-2 | 441,000 | | | 444,375 | |
Series 2022-1 Securitization Senior Notes, Class A-2 | 361,350 | | | 364,088 | |
Term Loan Facility | 492,500 | | | 496,250 | |
Revolving Credit Facility | 215,000 | | | — | |
Other debt (a) | 19,262 | | | 51,836 | |
Total debt | 2,945,675 | | | 2,784,175 | |
| | | |
Less: unamortized debt issuance costs | (36,747) | | | (45,908) | |
Less: current portion of long-term debt | (31,869) | | | (32,986) | |
Total long-term debt, net | $ | 2,877,059 | | | $ | 2,705,281 | |
(a) Consists primarily of finance lease obligations.
Series 2019-3 Variable Funding Securitization Senior Notes
In December 2019, Driven Brands Funding, LLC (the “Issuer”) issued Series 2019-3 Variable Funding Senior Notes, Class A-1 (the “2019 VFN”) in the revolving amount of $115 million. The 2019 VFN have a final legal maturity date in January 2050. The commitment under the 2019 VFN were set to expire in July 2022, with the option of three one-year extensions. In July 2023, the Company exercised the first of three one-year extension options. The 2019 VFN are secured by substantially all assets of the Issuer and are guaranteed by the Securitization Entities. As of July 1, 2023, borrowings will incur interest at the Base Rate plus an applicable margin or Secured Overnight Financing Rate (“SOFR”) plus an applicable term adjustment. No amounts were outstanding under the 2019 VFN as of September 30, 2023 and no borrowings or repayments were made during the nine months ended September 30, 2023. As of September 30, 2023, there were $25 million of outstanding letters of credit which reduced the borrowing availability under the 2019 VFN.
Driven Holdings Revolving Credit Facility
In May 2021, Driven Holdings, LLC, (“the Borrower”) a Delaware limited liability company and indirect wholly-owned subsidiary of Driven Brands Holdings Inc., entered into a credit agreement to secure a revolving line of credit with a group of financial institutions (“Revolving Credit Facility”), which provides for an aggregate amount of up to $300 million, and has a maturity date in May 2026 (“Credit Agreement”). On June 2, 2023, the Credit Agreement was amended pursuant to which as of July 1, 2023, borrowings will incur interest at the Base Rate plus an applicable margin or SOFR plus an applicable term adjustment. The Revolving Credit Facility also includes periodic commitment fees based on the available unused balance and a quarterly administrative fee.
There was $215 million outstanding on the Revolving Credit Facility as of September 30, 2023 with $335 million of borrowings and $120 million of repayments made during the nine months ended September 30, 2023.
The Company’s debt agreements are subject to certain quantitative and qualitative covenants. As of September 30, 2023, the Company and its subsidiaries were in compliance with such covenants.
Note 8 — Leases
During the nine months ended September 30, 2023, the Company sold ten maintenance and 38 car wash properties in various locations throughout the United States for a total of $171 million, resulting in a net gain of $25 million. Concurrent with the closing of these sales, the Company entered into various operating lease agreements pursuant to which the Company leased back the properties. These lease agreements have initial terms of 16 to 20 years. The Company does not include option periods in its determination of the lease term unless renewals are deemed reasonably certain to be exercised. The Company recorded an
operating lease right-of-use asset and operating lease liability of $132 million and $132 million, respectively, related to these lease arrangements as of September 30, 2023.
During the nine months ended September 24, 2022, the Company sold seven maintenance and 30 car wash properties in various locations throughout the United States for a total of $156 million, resulting in a net gain of $18 million. Concurrent with the closing of these sales, the Company entered into various operating lease agreements pursuant to which the Company leased back the properties. These lease agreements have initial terms of 15 years to 20 years. The Company does not include option periods in its determination of the lease term unless renewals are deemed reasonably certain to be exercised. The Company recorded an operating lease right-of-use asset and operating lease liability of $121 million and $121 million, respectively, related to these lease arrangements as of September 24, 2022.
The Company impaired $62 million of right-of-use assets relating to 28 leased stores that were approved for closure or underperforming during the three months ending September 30, 2023. Refer to Note 6 for additional information. Supplemental cash flow information related to the Company’s lease arrangements for the nine months ended September 30, 2023 and September 24, 2022, respectively, was as follows:
| | | | | | | | | | | |
| Nine Months Ended |
(in thousands) | September 30, 2023 | | September 24, 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows used in operating leases | $ | 108,232 | | | $ | 86,423 | |
Operating cash flows used in finance leases | 866 | | | 1,214 | |
Financing cash flows used in finance leases | 1,056 | | | 1,185 | |
| | | |
| | | |
| | | |
Note 9 — Shareholders’ Equity
In August 2023, the Board of Directors authorized a program to repurchase up to $50 million of the Company’s common stock (the “Share Repurchase Program”). During the three and nine months ended September 30, 2023, the Company repurchased 3,601,694 shares of its common stock for approximately $50 million, at an average price per share of $13.87. All repurchases were made in open market transactions. As of September 30, 2023, the Company has completed the purchase of all shares under the Share Repurchase Program.
Note 10 — Equity-based Compensation
The Company granted new awards during the three months ended September 30, 2023, consisting of 8,142 restricted stock units (“RSUs”). The Company granted new awards during the nine months ended September 30, 2023 consisting of 388,878 RSUs and 647,359 performance stock units (“PSUs”).
Awards are eligible to vest provided that the employee remains in continuous service on each vesting date. Generally, the RSUs vest ratably in three installments on each of the first three anniversaries of the grant date. The PSUs vest after a three-year performance period. The number of PSUs that vest is contingent on the Company achieving certain performance goals, one being a market condition and the other being a performance condition. The number of PSU shares that vest may range from zero to 200% of the original grant, based upon the level of performance. The awards are considered probable of meeting vesting requirements, and therefore, the Company has started recognizing expense.
The fair value of the total RSUs granted during the three months ended September 30, 2023 was less than $1 million. The fair value of the total RSUs, performance based PSUs, and market based PSUs granted during the nine months ended September 30, 2023 were $11 million, $11 million, and $9 million, respectively. The Company based the fair value of the RSUs and performance based PSUs on the Company’s stock price on the grant date.
The range of assumptions used for issued PSUs with a market condition valued using the Monte Carlo model were as follows:
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| Nine months ended |
| September 30, 2023 | | September 24, 2022 |
Annual dividend yield | —% | | —% |
Expected term (years) | 2.6 - 2.8 | | 2.4 - 2.8 |
Risk-free interest rate |
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